Be Wary Of Dongkuk Industries (KOSDAQ:005160) And Its Returns On Capital

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. On that note, looking into Dongkuk Industries (KOSDAQ:005160), we weren't too upbeat about how things were going.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Dongkuk Industries:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.032 = ₩18b ÷ (₩742b - ₩168b) (Based on the trailing twelve months to December 2020).

Thus, Dongkuk Industries has an ROCE of 3.2%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 4.7%.

View our latest analysis for Dongkuk Industries

Historical performance is a great place to start when researching a stock so above you can see the gauge for Dongkuk Industries' ROCE against it's prior returns. If you'd like to look at how Dongkuk Industries has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

In terms of Dongkuk Industries' historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 7.5% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Dongkuk Industries to turn into a multi-bagger.

The Key Takeaway

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Investors must expect better things on the horizon though because the stock has risen 16% in the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

Dongkuk Industries does have some risks, we noticed 3 warning signs (and 1 which is significant) we think you should know about.

While Dongkuk Industries may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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